Producer Prices Rise on Higher Energy Costs

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factory wholesaleInflation at the wholesale level remains tame, as producer prices rose 0.4% in August, but that statistic was boosted higher by a jump in often-volatile energy prices, the U.S. Labor Department announced Thursday. The core rate, which excludes food and energy, rose just 0.1%.

A Bloomberg survey had expected producer prices to increase 0.3% in August after an 0.2% rise in July, and the core rate to rise 0.1%, after an 0.3% July rise. In June, producer prices fell 0.5%, with the core rate rising 0.1%.

It was the third rise in producer prices since March, and it may be just what the U.S. Federal Reserve is looking for. The rise suggests that deflation has not taken hold in the U.S. economy, despite its substantially smaller workforce and the effects of globalization on costs.

Deflation -- a period of sustained price declines -- robs companies of revenue, and can lead to a recession, or even worse economic conditions -- and it's obviously a price scenario the U.S Federal Reserve would take considerable action to avoid, should it surface.

Over the past 12 months, prices at the wholesale level have increased 3.1%. That's lower than the 4.2% year-over-year rate recorded in July. Wholesale prices rose 4.4% in 2009 and 0.9% in 2008.

It's easy to see the culprit in the top-line 0.4% August producer price rise: energy prices, which jumped 2.2% in August. Gasoline prices surged 7.5% and diesel fuel jumped 6.4%. Meanwhile, food prices fell 0.3% in August.

Little Sign of Core Wholesale Inflation

Take away the volatile energy and food component, and there's little sign of inflation in the past 12 months. Core producer prices -- closely monitored by the Fed -- have risen just 1.3% in the past year. That's lower than the 1.5% year-over-year core rate recorded in July, but it's still within the Fed's comfort zone for inflation.

In August, materials for further processing jumped 2.3%, intermediate supplies and components rose 0.3%, and capital equipment rose 0.1%.

Business executives, economists and Fed officials closely monitor the producer price index because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core-PPI statistic, which excludes the often-volatile food and energy component, to gauge core business costs.

In sum, August's producer price report shows a U.S. economy that's exhibiting pricing pressure in selected categories at the wholesale level, but that (so far) has not lapsed into deflation. It's a period of disinflation/low inflation that, at minimum, should enable the Fed to maintain its so-called extended period low-interest rate monetary policy to stimulate the economy though the fall.
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